How close are we to full employment?

Today’s labour market numbers are very good. The employment rate continues to rise, reaching a new record high of 73.5 per cent in the first quarter of this year. The unemployment rate has fallen to 5.5 per cent, and average earnings (excluding bonuses) have risen by 2.2 per cent on the year. How long can we expect the good news to continue?

Last year, the chancellor George Osborne announced an ambition for the UK to reach ‘full employment’. While at the time he offered little detail about the exact nature of this target, he did set a goal for the UK to have the highest employment rate in the G7 group of countries.

The UK is still in the middle of the pack on this measure; at the end of last year, the latest quarter for which we have comparable data across the G7, the UK’s 72.2 per cent employment rate was behind Canada (72.5 per cent), Japan (73 per cent) and Germany (73.9 per cent).

If the UK is going to continue its recent performance and push ahead of these countries on employment, it needs to reflect on who remains out of work and what is preventing them finding a job. It could be that a sustained economic recovery will create enough jobs to bring us up to a 74 or 75 per cent employment rate. But equally, there are several reasons for caution.

As more and more people move into work, those that remain without a job will tend, on average, to be those with fewer qualifications and experience (especially the young), those with health conditions that inhibit their ability to find and stay in work, and those living in parts of the country where job creation has proved more difficult.

The youth unemployment rate has fallen, but remains nearly three times as high as the overall unemployment rate. This means two fifths of the UK’s unemployed are under-25s. The coming introduction of a youth allowance may help slightly, in that it guarantees training or work to those young people on JSA for 6 months or more.

While we have argued in the past for a similar guarantee, the government’s plan is to pay young people on the scheme the youth rate of JSA, rather than the minimum wage. This, and the culture around the new allowance, needs careful consideration – make it too punitive and many young people will opt out of much-needed support entirely.

For those with health conditions the move from incapacity benefit to the new Employment Support Allowance has not transformed their chances of getting work. Only around 12 per cent of new ESA claimants have found work through the government’s work programme, with an even lower success rate among those with mental health conditions. Remember that this has happened during a largely unprecedented jobs boom and it becomes even more concerning.

Finally, some regions of the UK have performed less well than the national trend. Over the last year, the employment rate actually fell in Wales, and has grown very weakly in English regions such as the North East and Yorkshire. Unless the recovery is more balanced across the UK, it may act as a dampener on the employment rate’s ability to rise further.

On top of the above, there are some emerging signs of difficulties in the hiring market; the latest REC report on jobs found that availability of staff for both permanent and temporary positions has been falling for several months. And the welcome rise in pay growth seen in this month’s data could partially be due to employers competing for increasingly scarce staff. If the skills of those out of work are not a good fit for the jobs on offer, expect this pattern to continue.

There is some good news; the government’s commitment to doubling the number of hours of free childcare for three and four year-olds will hopefully have an impact on the ability of parents to work, for example. But it would be wrong to think the UK’s employment success of recent years is secure and sustainable.

Reaching the highest rate of employment in the G7 will require re-balancing job creation across the country, and tackling the difficulties that those furthest from the labour market face finding and staying in work.